Pidilite Industries reported Q3FY23 consolidated revenue growth of 5.2% YoY (3-year CAGR of 15.9%) on a high base, with consumer & bazaar (C&B) segment revenue up 6.9% YoY.

Consolidated operating margin contracted 272bps YoY (flat QoQ) to 16.5% due to higher raw material costs (gross margin declined 175bps YoY) resulting in EBITDA/PAT decline of 9.7%/15.2% YoY, respectively.

Management stated demand was healthy in tier-1 to tier-3 markets, but rural and semi-urban markets were lacklustre during the quarter. Management expects revival in those markets over the next six months aided by a good monsoon. They indicated the benefit of lower RM costs should be seen from Q4FY23 onward and that they are hopeful of margins returning to their historical as well as guided range of 20-24% in H1CY23.

Tepid revenue growth due to high base: Pidilite reported consolidated revenue growth of 5.2% YoY (flat QoQ; 3-year CAGR of 15.9%) on a high base (which was due to high dealer stocking as substantial price hikes were taken in Q3FY22). Overseas subsidiaries reported revenue growth at 9.3% YoY (Asia grew 5.9% YoY, Middle East and Africa 18.8% YoY, Americas 4.6% YoY) as management indicated softening in international demand. Domestic subsidiaries’ revenue grew 15.3% YoY. On a consolidated basis, the C&B segment reported revenue growth of 6.9% YoY (flat QoQ) while the B2B segment reported decline of 3% YoY (-3.8% QoQ). Standalone revenue increased 4.9% YoY (3-year CAGR of 17.6%) with volume growth of ~1% YoY in C&B. Management stated demand trend during Nov-Dec’22 was healthy, but it was adversely affected in Oct’22 due to extended monsoon and festivities, which impacted overall growth in Q3. The company expects demand conditions to remain positive going ahead due to pick-up in the housing market.

Operating margin to improve as RM cost pressures ease: Consolidated operating margin fell 272bps YoY (flat QoQ) due to higher RM costs (gross margin declined 175bps YoY) and employee/other costs rose 48bps / 49bps YoY, resulting in EBIDTA / PAT decline of 9.7% / 15.2% YoY. Overseas subsidiaries’ EBITDA margin contracted by 231bps YoY (-197bps QoQ) due to impact of higher RM costs and currency depreciation, while domestic subsidiaries’ margin improved 747bps YoY (-102bps QoQ) on low base. Management stated that the benefit of lower RM costs will be seen from Q4 onward as most of the high-cost inventory has been consumed in Q3. Company expects EBITDA margin to return to its historical range of 20-24% in H1CY23 as RM pressures have eased significantly.

Valuation & View: Pidilite’s operating performance in Q3FY23 was lower than estimated, but we believe it has near-term demand and margin tailwinds on account of decline in RM costs. We continue to like the company for its franchise, strong growth prospects, innovative product portfolio, brand recall, market leadership in many categories and robust balance sheet.